SETTLEMENT MODELS

Developed by STICODEVAM

Presented by Mrs Boutheina NASRA

At the 15th AMEDA meeting It was agreedby members to create a technical committeepiloted by Tunisian depository to study differentsettlement models applied by AMEDA members.

To this end, this presentation will deal withsome AMEDA members experiences concerningsettlement models

INTRODUCTION

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Delivery Versus Payment : a mechanism that ensures that delivery occurs if and only if payment occurs.

Delivery Versus Payment

Without such a mechanism counterparties are exposed to principal risk, that is, the risk that the seller of a security

could deliver but not receive payment or that the buyer of a security could make payment but not receive delivery

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Model Settlement

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Gross Net

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Classification B.I.S.*

* B.I.S. = Bank for International Settlements

Three broad structural approaches to achieving DVP (or moregenerally, to creating a strong linkage between delivery andpayment in a securities settlement system):

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Securities

Securities

Funds

Securities

Funds

Funds

Most model 1 systems extend credit to their participants, in some cases substantialamounts of credit.(either intraday or overnight).

The completion of settlements in such systems may require participants to maintain substantial money balances, especially if they are unable to adjust their money balances during the processing cycle. If sufficient money balances are not available, high “fail”

rates may result, implying substantial liquidity risk and replacement cost risk to participants

Systems that settle transfer instructions for both securities and funds on a trade-by-trade(gross) basis, with final (unconditional) transfer of securities from the seller to the buyer (delivery) occurring at the same time as final transfer of funds from the

buyer to the seller (payment);

Model 1:Gross, simultaneous settlementsof securities and funds transfers

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To provide strong assurances that sellers will receive payment for delivered securities : creation of an assured payment system in which the seller delivers securities in exchange for an irrevocable commitment by the buyer’s bank to make payment to the seller’s bank at the end of the

processing cycle

The fact that final securities transfers precede final funds transfers in this model clearly has the potential to expose sellers of securities to

substantial principal risk

Systems that settle securities transfer instructions on a gross basis with final transfer of securities from the seller to the buyer (delivery)

occurring throughout the processing cycle, but settle funds transfer instructions on a net basis, with final transfer of funds from the buyer to

the seller (payment) occurring at the end of the processing cycle

Model 2:Gross settlements of securities transfersfollowed by net settlement of funds transfers

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In these systems the completion of settlement is generally guaranteed by the system operator such as central

counterparty

Final transfers of the net securities balances and net funds balances are executed, If and only if all participants in net debit positions

have sufficient balances of funds and securities.

Systems that settle transfer instructions for both securitiesand funds on a net basis, with final transfers of both

securities and funds occurring at the end of the processing cycle.

Model 3: Simultaneous net settlementof securities and funds transfers

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* 12 members (58%) have replied to AMEDA inquiryabout settlement models.

* Some of the feedbacks lack sufficient details whichreduces the synthesis outcome.

In what follows, a description of 15* experiencesamong AMEDA members will be presented with regardto their adopted settlement models

* Kuwait Clearing Company, Tadawul and Algerie Clearing have answered the enquiry sent by STICODEVAM about settlement models in 2011

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Settlement model : Reverse BIS MODEL 2Settlement Cycle : Trades settle on T+3Settlement process :‾ On settlement date, funds transfer between the

seller’s and buyer’s participants takes placethrough the settlement bank. Immediately after this,

the seller’s Securities Account is debited and thebuyer’s Securities Accounts is credited.

CDS Mauritius’s Settlement

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Settlement model : BIS MODEL 2. Settlement Cycle : T+2Settlement process :

- All brokers & custodians are Clearing Members

- DFM completes financial settlement by 10.00AM & starts securities settlement from 10.15AM to ensure that DVP between DFM and DFM Clearing Members. Securities are delivered only if full payment is made.

DFM’s Settlement

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- DFM does not require a guarantee fund now because it does not face marketrisk; exposures are mitigated as follows:

a. Buy trades - full purchase values of buy trades collaterized 100% byClearing Member via a real-time on-line collateral adequacy checkingprocess before a buy order can becomes a valid order & DVPsettlement;

b. Sell trades - sell orders are pre-validated real-time on-line againstsecurities availability before a sell order becomes a valid order.

- Trades are settled on T+2 but in order to accommodate settlement byinstitutional investors using services of Custodians, DFM implemented aSettlement Rejection Process for Custodian investors. This means that thebroker clearing member will settle the rejected trade first until the Custodianreceives matched settlement instructions from its clients to settle.

DFM’s Settlement

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Settlement model : BIS MODEL 2. Settlement Cycle : T+3.  Guarantee Fund. Each clearing member has a committed line of credit with a bank.Settlement Bank – commercial bank electronically linked with the Clearing House.

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Settlement model : BIS MODEL 2. 

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Settlement model : BIS MODEL 2. 

Settlement Cycles :

- RTGS for same day trading,- T+1 for treasury bonds,- T+2 for dematerialized securities.

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Settlement process :‾ Each participant deposits cash necessary for settlement in the clearing bank on

SD-1 afternoon at 2.00 pm.‾ On SD-1 afternoon, participants' cash positions are sent to MCDR through

statement of accounts issued by the clearing banks.‾ Cash balances are being entered into MCDR settlement system.‾ On SD morning at 7.30 AM settlement is concluded.‾ On SD morning:

the settlement results (credits and debits) are being sent back to theclearing banks which debts and credit the participants' accounts accordingto the statements issues by MCDR systems.the net cash settlement instructions is being sent to the Central Bank ofEgypt to settle among clearing banks and finalize the settlement process(irrevocable and final payment system).

‾ After the settlement is completed, each participant receives a settlementstatement. 15

Settlement model : BIS MODEL 2Settlement Cycle : T+3Settlement process :

- Computation of the obligations of such the buyerand the seller is done by CRQ.

- Cash obligations are communicated to thesettlement bank (Central Bank). The commercialbanks hold settlement accounts of the brokers.

- Registration department transfers ownership ofthe traded securities (depository registry).

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Settlement model : BIS MODEL 3Settlement Cycle : T+3The settlement process :- Selling and Buying Banks send their orders to their respective Brokers.- Selling and Buying Brokers place their respective orders on the Beirut Stock

Exchange.- The BSE matches the orders and forms a trade which is sent to Midclear for

allocation.- Selling and Buying Brokers allocate the Shareholder numbers on T.- Selling/Bying Bank and Broker send DAP and RAP instructions to Midclear

to be settled on T+3.- Midclear performs clearing (matching the instructions and checking for the

adequate balance).- Settlement of cash via BDL (RTGS system).- Settlement of the securities Midclear (CSD).

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Market Type BIS Model Settlement CycleEquities – On‐market Model 3Equities – Off‐market Model 2Bonds Model 3 T+3Money Market Model 1 T+0

‐ Equities : Multiple settlement runs with first settlement run @ 7h30 (last @ 15h). 

‐ Bonds:  The first settlement runs@ 11h00 and the last settlement runs @ 15h

STRATE applies a settlement model by market type                   DVP simultaneous , final and irrevocable

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Settlement models : BIS MODEL 2 for exchange.BIS MODEL 1 for OTC.

Settlement Cycles :‐ Exchange :T+3‐OTC : T+0Settlement Process :‐ Cash accounts held at Central Bank

- MCL sends cash instructions to CB CB reports back to MCLbefore debit/credit of securities accounts

MAROCLEAR’s Settlement

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Settlement model : BIS MODEL 2

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BHB’s Settlement

Settlement model : BIS MODEL 2. Settlement process :

- Trades reported to CDS. - CDSC generates settlement reports for CDAs (brokers &

custodians) & settlement bank. Custodians have right ofnegative affirmation.

- Settlement bank confirms funds movement betweenCDAs accounts and CDSC transfers securitiesimmediately.

In case of funds failure, CDSC draws from GF.

CDSC ‘s Settlement

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Settlement model : BIS MODEL 2Settlement cycles :

Equity & Exchange Traded Funds (ETFs) : T+0SUKUK and Bond : T+2

Settlement Process :- Settlement of cash obligations on net basis (same day

immediately after market close) via the RTGS system.- Clearing members (commercial banks : members of RTGS

system) : real time trading caps based on certain collateralagreed with the brokerage firms.

TADAWUL Settlement

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Settlement model : BIS MODEL 1.

Settlement cycle : T+1

Stock market Trades (Both cash and stock must be deposited next business day) 

Kuwait Settlement

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Settlement model : BIS MODEL 2

Settlement cycles :

- OTC : T+0- Stock markets (Treasury bonds) : T+1- Primary market : T+2- Stock market (corporate bonds & shares) : T+3

Al gerie Clearing Settlement

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Trade

Settlement

Matching

T+3

OTC Treasury Bonds

Sticodevam’smembers area

Trade by trade on T

Central Bank

dedicated line,

T+1/T+2/T+3gross

settlement of securitiestransfers

Net  funds

securities’ positions are OK

Tunisian Stock Exchange

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Settlement model : BIS MODEL 2Settlement Cycles :Exchange : T+3OTC treasury bonds : T+1, T+2, T+3

Settlement Process :On T+2 by 6 pm, STICODEVAM:‾ Checks the securities’ positions and prepares payment

instructions on a net basis.‾ Notifies the clearing banks and brokers of the net cash

balances that will be credited or debited to/from theiraccounts at the Tunisian Central Bank on T+3 (10 am).

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‾At T+3 by 10 am, STICODEVAM sends instructionsfor cash clearing to the Central Bank (RTGS) via theelectronic cash clearing system and make available tomembers the securities statement via its members area

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STICODEVAM’s Settlement

Settlement ModelsModel 1 Model 2 Model 3

Kuwait Clearing Company

STICODEVAM 

(Tunisia)

BHB (Bahrain)

CSD MAURITIUS

DFM (Dubai)

GSD (Ghana)

CDS (Palestine)

MCDR (Egypte)

CSD QATAR

CDSC Kenya

TADAWUL (Saudi

Arabia)

Algerie Clearing

MIDCLEAR (Lebanon)

MAROCLEAR (Morocco)

OTC   Exchange ‐

STRATE (South Africa)

Money Market Equities – Off –market* Equities – On‐market

* Bonds

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Conclusion

According to replies :

11 members (72%) apply Model 2 ;1 member (7%) applies Model 1;1 member (7%)applies 2 Models (1 & 2);1 member (7%) applies Model 3;1 member (7%) applies 3 Models.

Conclusion

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Although model 2 is the most commonly used by members (72%), it’s applied differently:

Gross settlement of securities transfers followed bynet settlement of funds transfers;

Net settlement of funds transfers followed byGross settlement of securities transfers (compliantwith IOSCO recommendations).

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Conclusion

Any Questions ?

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